10-Q/A: Orgenesis Inc. Restates Q3 2023 Financials Due to Accounting Errors

Sentiment:

Quarterly Report Amendment 15 April 2024 5:03 PM

Orgenesis Inc. has amended its Q3 2023 report to correct accounting errors related to revenue recognition, credit losses, and equity investments.

Capital raiseThe company plans to raise additional capital to fund its operations and repay outstanding loans.The company has entered into an Equity Line of Credit Agreement for up to $25 million.The company has recently completed a registered direct offering, raising approximately $943 thousand after deducting fees and expenses.

Worse than expectedThe company's restated financials show a significant decrease in revenue and a substantial increase in net loss, indicating worse than expected performance.The identification of material weaknesses in internal control over financial reporting and ineffective disclosure controls also point to worse than expected operational and financial management.

Summary

Orgenesis Inc. has restated its financial statements for the quarter ended September 30, 2023, due to errors in accounting for revenues, equity investees, goodwill, share on loss of associated companies, selling, general and administration expenses, convertible loan receivable and credit losses related to such convertible loan.
The company overstated revenues due to inappropriate accounting for revenue recognition where collectability was not probable.
Account receivable and convertible loan were also restated due to inappropriate accounting for estimated credit losses.
The restatement resulted in a significant decrease in reported revenue from $14.1 million to $0.365 million for the nine months ended September 30, 2023.
The company's net loss for the nine months ended September 30, 2023, increased from $20.6 million to $58.3 million after the restatement.
The company's management has determined that its disclosure controls and procedures and internal control over financial reporting were not effective as of September 30, 2023, due to the inappropriate measurement of expected credit losses and revenues.

Sentiment

Score: 2

Explanation: The document reveals significant accounting errors, a substantial restatement of financials, material weaknesses in internal controls, and a going concern issue, all of which point to a very negative outlook for the company.

Positives

The company is taking steps to correct the accounting errors and improve its internal controls.
The company has secured additional financing through equity and loan agreements.

Negatives

The restatement resulted in a significant decrease in reported revenue and a substantial increase in net loss.
The company identified material weaknesses in its internal control over financial reporting.
The company's disclosure controls and procedures were deemed ineffective.
The company has a substantial accumulated deficit of $169.999 million as of September 30, 2023.
The company has incurred negative cash flows from operating activities of $14.335 million for the nine months ended September 30, 2023.
The company's current and projected cash resources are not sufficient to meet its obligations for the next 12 months, raising substantial doubt about its ability to continue as a going concern.

Risks

The company's ability to continue as a going concern is in doubt due to insufficient cash resources.
The company may need to raise additional capital or reduce activities to fund operations.
The company's stock is at risk of being delisted from the Nasdaq Capital Market due to not meeting the minimum bid price requirement.
The company's operations may be affected by economic, political, geopolitical and military conditions in Israel.
The company is involved in legal proceedings that could have a material impact on its financial condition.

Future Outlook

The company expects that its current and projected cash resources and commitments will not be sufficient to meet its obligations for the next 12 months, raising a substantial doubt about its ability to continue as a going concern. Management plans include raising additional capital, exploring avenues to increase revenue, and reduce capital expenditures.

Management Comments

Management has determined that the company had a material weakness in its internal control over financial reporting.
Management plans include raising additional capital to fund the company's operations and to repay outstanding loans.
Management is exploring additional avenues to increase revenue and reduce capital expenditures.

Industry Context

The company operates in the biotech industry, which is characterized by high research and development costs and long development timelines. The company's focus on point-of-care cell and gene therapies is an attempt to address the high costs and logistical challenges associated with traditional manufacturing methods. The restatement and identified weaknesses in internal controls highlight the challenges faced by companies in this sector, particularly those with complex revenue recognition and accounting requirements.

Comparison to Industry Standards

The restatement of financial results is a significant deviation from industry standards, as it indicates a lack of robust internal controls and accounting practices.
Compared to other biotech companies, Orgenesis's revenue is significantly lower, and its losses are substantially higher, indicating a need for improved operational efficiency and financial management.
The company's reliance on equity and loan financing is not uncommon in the biotech industry, but the company's current financial situation raises concerns about its ability to secure future funding.
The deconsolidation of Octomera and the shift to equity method accounting is a complex transaction that requires careful monitoring and compliance with accounting standards, which the company has struggled with.
The company's challenges in revenue recognition and credit loss estimation are not unique to the biotech industry, but the magnitude of the errors suggests a need for more robust accounting policies and procedures.

Legal Proceedings

The company is involved in a legal proceeding in the Tel Aviv District Court regarding royalty payments.
The company is involved in a legal proceeding in the Tel Aviv District Court regarding finders fees and royalties.
The company is involved in a legal proceeding in the Supreme Court of the State of New York regarding a convertible loan agreement.

Related Party Transactions

The company has related party transactions with Octomera LLC and its subsidiaries.
The company has receivables from related parties in the amount of $1.052 million.
The company has payables to related parties in the amount of $0.132 million.

Stakeholder Impact

Shareholders are negatively impacted by the restatement, the decrease in share price, and the risk of delisting.
Employees may be affected by potential reductions in headcount and changes in operations.
Customers may be impacted by the company's financial instability and potential changes in service delivery.
Creditors are at risk due to the company's going concern issue and potential inability to repay debts.
Suppliers may be impacted by the company's financial instability and potential changes in payment terms.

Next Steps

The company needs to regain compliance with Nasdaq's minimum bid price requirement by March 25, 2024.
The company needs to raise additional capital to fund its operations and repay outstanding loans.
The company needs to improve its internal controls and disclosure procedures.
The company needs to address the legal proceedings it is involved in.

Key Dates

Date	Description
2018-11-03	Date of 2% Notes purchased from the Company.
2019-05-17	Date of a Convertible Loan Agreement.
2019-10-03	Date of a Convertible Credit Line Agreement.
2022-01-17	Date of a legal proceeding.
2022-04-12	Date of a Convertible Loan Agreement.
2023-01-10	Effective date of convertible loan agreements with NewTech and Malik.
2023-01-12	Date of extension agreements for convertible loans.
2023-02-22	Date of Securities Purchase Agreement.
2023-02-23	Date of Securities Purchase Agreement.
2023-03-27	Date of Koligo Therapeutics Inc. convertible loan agreement.
2023-05-05	Date of MM Amendment One.
2023-06-30	Date of deconsolidation of Octomera and MM Amendment Two.
2023-07-25	Date of loan from offshore investor and settlement agreement with Mircod LLC.
2023-08-15	Date of loan from an investor.
2023-08-22	Date of MM Amendment Three.
2023-08-29	Date of Orgenesis Inc. Amendment Four.
2023-08-31	Date of Securities Purchase Agreement.
2023-09-05	Date of a legal proceeding.
2023-09-06	Date of MM Amendment Five.
2023-09-13	Date of MM Amendment Six.
2023-09-27	Date of Nasdaq deficiency notice.
2023-09-28	Date of MM Amendment Seven.
2023-09-29	Date of Sai Convertible Loan Agreement.
2023-09-30	End of the reporting period.
2023-10-12	Date of Orgenesis Inc. Amendment Eight.
2023-10-25	Date of a legal proceeding.
2023-10-26	Date of a legal proceeding.
2023-10-31	Date of loans to subsidiaries.
2023-11-08	Date of Securities Purchase Agreement and Equity Line of Credit Agreement.
2023-11-09	Date of closing of the registered direct offering.
2023-11-13	Date of original filing of the quarterly report and termination of license agreement with Yeda.
2024-03-25	End of the 180-day compliance period for Nasdaq minimum bid price requirement.
2024-04-15	Date of filing of the amended quarterly report.

Keywords

restatement, accounting errors, revenue recognition, credit losses, internal control, financial reporting, deconsolidation, equity method investment, convertible loans, going concern, Nasdaq delisting, legal proceedings

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